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Near term headwinds; long term story remains intact

About the stock: Indo Count (ICIL) is one of India’s largest home textile manufacturer, exporter with an extensive product range spanning across bed sheets, quilts & bed linen. It has a presence in top nine out of 10 top big box retailers in US.

* ICIL is an integrated bedding solution provider, boasting capacity of 90 million metre per annum of dyeing/processing and cutting /sewing

* It exports to nearly 54 countries with US being the prime market (~75% of revenues and commanding ~20%+ market share in bed sheets)

Q3FY22 Results: Weighed down by various headwinds, reported soft performance

* Volumes declined 12% YoY to 21.1 million metre on account of unprecedented supply chain challenges and lower demand in key geographies on account of third wave of pandemic. Judicious price hikes and better product mix translated into average realisations increasing by 9% YoY to | 344/metre. Revenue de-grew 3% YoY to | 756.4 crore

* Conscious effort to sell value added products has allowed the company to combat inflationary pressure and maintain 50%+ gross margins (up 380 bps YoY). EBITDA margins declined 176 bps YoY to 15.3%

* PAT declined 23% YoY to | 71.2 crore on the back of exceptional expense worth | 21 crore

What should investors do? Since our initiation report, the stock price has appreciated by 26% (from | 170 in June 2021 to | 215 in February 2022).

* We maintain BUY recommendation on the stock

Target Price and Valuation: We value ICIL at | 300 i.e. 15x FY23E EPS

Key triggers for future price performance:

* Recent bill passed by the US Senate to ban imports of cotton products from China’s Xinjiang region is expected to further fuel ‘China+1’ strategy (80%+ of Chinese cotton is produced in that region)

* With the latest acquisition of GHCL, it would be able to add a whole new avenue of customer base, which is untapped, thereby leading to gain in global market share. ICIL plans to cross sell its value added categories (fashion, institutional and utility categories) to the existing clientele of GHCL

* Focus on increasing share of B2C and D2C segment through its branded portfolio (owned and licenced). This would aid margins, going forward

* Asset light nature of the business (2.5x asset turn) and strong EBITDA margins (~15-16%) would translate into RoCE of 22% in FY23E

Alternate Stock Idea: Apart from ICIL, in our textile coverage we also like KPR Mill.

* KPR Mills is among select vertically integrated textile players in India that has displayed consistent operating margins with strong return ratios

* BUY with target price of | 820

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